Seniority Wages and Employee Participation

Why do employers pay seniority wages? The principal-agent theory stresses that employers might want to retain and motivate their employees by paying them a low entry wage and higher wage increases with longer tenure rather than productivity development. This contribution tests the empirical relevance of this seniority wage interpretation on the basis of German linked employer–employee panel data. It focuses on the role of works councils and unions. The theoretical hypotheses that predict a positive impact of both forms of employee participation (and their interaction) are confirmed. The chapter also gives an outlook on management options when seniority wages are no longer sustainable in the face of ageing workforces.